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Foreign

Dir ect

In vestment
By
Amo s W ang'omb e
Hu W ei
Li X ia o
Mar cel Gw angw aá 1
Def inati on of FDI
Foreign direct investment (FDI)
occurs when an investor based
in one country (the home
country) acquires an asset in
another country ( the host
country) wi th the inte nt to
manage the asset.

2
Types of FDI

• Equity C apit al ( the value of the


MNC‘s share investment in shares of
an enterprise in a foreign country)
• Reinvested e arnin g (Profit
reinvested e.g represent up to 60%
of outward FDI in USA &UK)
• Oth er c apital (short and Long-
term borrowing & lending of funds
between the MNC and the affiliate) 3
Ori gin of Stat istical
Data
• From the ministries and agencies
which administer the country‘s law
and regulations on FDI
• Government and other surveys which
evaluate financial and operating data
of Companies.
• National balance - of-payments
statistics
4
Average annual Inf lows of
FDI to top 10 Developi ng
Countri es
1984/1989 1993
Host Host Host 1995
Mexico 2436 China 27515 China 37500
China 2282 Argentina 6305 Mexico 6984
Singapore 2239 Singapore 5016 Malaysia 5800
Hong Kong 1422 Malaysia 5006 Singapore 5302
Brazil 1416 Mexico 4389 Brazil 4859
Bermuda 1144 Bermuda 2960 Indonesia 4500
Egypt 1085 Indonesia2004 Argentina 3900
Saudi Arabia 1084 Thailand 1726 Chlie 3021
Malaysi 798 HONG.H 1667 Bermuda 2900
a 691 1369 Thailand 2300
Taiwan Saudi. A

66% % Share 79% % Share 77% 5


% share
Outf low of FDI of s elected
devel opi ng c oun tri es( 1980
-1995)
1980 1985 1990 1995
Hong Kong 148 2345 13242 85156
Taiwan 97 204 12888 24344
China --- 131 2489 17268
Singapore 652 1320 4741 13842
Nigeria --- 5334 9652 11582
South Korea 142 526 2095 11079
Malaysia 414 749 2283 8903
Kuwait 568 930 3663 7655
Brazil 652 1361 6460
2397
6
Panama 811 2204 4188 4487
Co mparin g
Inflow/ Ou tflow
Inflow 1995 Outflow1995
China 6984 17268
Hong Kong 5302 85156
Singapore 5800 13842

Brazil 4859 6460

Saudi Aarabia 3021 11079

Malaysia 8903
2900

Taiwan 24344 24344


7
Questi on!

Wh y FDI a nd
not fi nancial
Loans ??? ?? ?
8
Th e determin ants o f
FDI

Micr o theor ies

• Ow ner ship
advantages
• Arise from economies of scale
with respect to intangible
assets such a skilled
management and know-how by 9
Th e determ in ants o f
FDI

Micr o theor ies

• Locati onal advantages


Pr oduct c ycl e
( ne w tec hn ol ogy pr od uc e a nd u se i n Hom e
co unt ry)

Standardi zed ( shi fted


abroad)
• Low Tax, Low la bou r cost, 10
Th e determ in ants o f
FDI

Inte rnal ization advantages


- Engaging in forei gn producti on rather
than licens ing it to a for ei gn f irm

- „ Transact ions costs“ thoery of


Wi lliamson 1975 (cost of using the
market )

It says t hat i t i s more advantageous 11


to concentrat e cer tain act ivi ti es
Macro-level explanations

• „ Rate of Prof it“ thoeri es


- ( Neo- liberal
framew ork that sust ain the idea of
unf ettered flows of Capi tl on a Global
lev el )

• Vent for surpl uss“


Ne ed fo r m ore (M aste r & S lave)
12
Macro-level explanations

• present si tuati on
„Monopol isst ic &
Oligopol ist ic Market“
( They have
som e uni que pr oducti on knowledge
or manager ial ski ll that coul d be
eas ily and prof itabl y be uti lized
abroad and ov er which the
corporati on wants to rem ai n contr ol) .
13
Macro-level explanations

Hori zon tal &


Vert ical intergr ation
Horizontal Vertical
•Production of •To obtain control of
diffrentiated needed raw-materials
products that are and does ensure
also produced at uninterrupted supply
home at the lowest cost
Ex-IBM 14
Pr actic al Dif ficultie s
in Meaurement .
• Lack of n ec ess ary
mach inery
• Di ffer ent accounti ng
conventi ons
• Do not ke ep to the I MF
gui del ine s
• Inter nat ional FDI
measurement
• Use adopted way to
measure company asset
15
Which facto rs
encourages F DI?
• Financial incentives (Funds from local
Government)

• Fiscal incentives (Exemption from


import duties)

• Indirect incentives (Provides land and


infrastructures at less commercial
16
prices)
Which facto rs
encourages F DI?
•Political stability

•Market potential & accessibility

•Repatriation of Profits

•Large economy

•Market size

•External debt discourages FDI


17
The Impetus f or a
Mul ti lateral Regi me for
FDI

• the Uruguay Round of trade


negotiations

• the negotiation on MAI within


OECD

• 1996 WTO Singapore Ministerial


meeting-----to establish a
working group 18
Uruguay Round (UR)

• The general idea of the industrial


countries :
• Framing global rules to achieve the
liberalization of FDI
• Negotiating or discussing a multilateral
investment agreement
• However,it‘s strongly contested by
many developing countries.
• WHY?
19
Neg ot iatin g
re su lt
• TRIMs(trade-related investment matters)

• GATS (General Agreement on Trade in


Services)

• TRIPs( Trade-Related Intellectual Property


Rights )

• ASCM (Agreement on Subsidies and


Countervailing Measures) 20
Pr ob lems
• They deal with particular
areas or particular aspects
of investment.

21
Mu ltilater al Agre eme nt on
Inves tment

Background
There is currently no comprehensive
multilateral legal framework that
provides investment disciplines.
The MAI is to remedy the supposed
weaknesses of the World Trade
Organization (WTO) agreement with
respect to investment issues.
22
Mu ltilater al Agre ement on
In vest ment

TRIMs are used mainly by developing


countries to promote dvelopment
objectives.
The MAI agreement as proposed by the
OECD Ministerial Council in 1995

23
Mu ltilater al Agre eme nt on
Inves tment

" provide a broad multilateral


framework for international
investment with high standards for
the liberalisation of investment
regimes and investment protection
and with effective dispute settlement
procedures." 24
Mu ltilater al Agre ement on
Invest ment

Overview
contents of the current draft of MAI
1. Renew the definition of FDI(broad definiton

„beyond the traditional notion of FDI to cover


virtually all tangible and intangible assets,and
which applies to both pre-establishment and
post-establishment.“(OECD,1997a.)
25
Mu ltilater al Agre ement on
Invest ment
• Countries that sign the MAI will be required to:

 Open all economic sectors, including real


estate, broadcasting and natural resources to
foreign ownership.

 Treat foreign investors no less favorably than


domestic firms.

 Treat all contracting Parties no less favorably

 Remove performance requirements

 Remove restrictions on the movement of


26
capital.
Mu ltilater al Agre ement on
Invest ment

 Compensate investors in full when their assets


are expropriated, either through seizure or
"unreasonable" regulation.

 Ensure that states and localities comply with


the MAI.

 Accept a dispute-resolution process allowing


investors to sue governments for damages
before international panels when they believe a
country's laws are in violation of MAI rules.

27
Mu ltilater al Agre ement on
Invest ment
Criticism
• unrestricted freedoms for foreign investors and
transnational corporations.

• Unequal responsibilities between Investor and


Investment receiver.

• Inability to reach a compromise on liberalization


commitments, general exceptions and considerations
to the environment and labor.

• the level of commitments to be included in the


agreement was too high for developing countries
28
Mu ltilater al Agre ement on
Invest ment

Potential contents of MAI


• Whether to allow exceptions to the “standstill” clause
for certain specific areas.
• Whether exceptions to most-favour-nation treatment
should be allowed for regional economic integration
organizations.
• Whether to allow a general exception for cultural
reasons
• Whether to include provisions covering environment
and labour issues
• concrete results regarding country-specific
29
exceptions
1996 WTO S ingapor e
Minis ter ial meeting

Establish a working group:

-to examine the relationship between


trade and investment

-to study issues raised by Members


relating to the interaction between
trade and competition policy

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1996 WTO S ingapor e
Mi nis ter ial meeting

Study three issues:

- implications of the relationship


between Trade and Investment for
development and economic growth

- the economic relationship between


trade and investment

- stock-taking and analysis of existing


international instruments 31
Adva nta ge s of
FDI
• Infrastructure and
technology trasfer

• Increased Productive
efficiency due to
competition from
multinational subsidiaries
32
Adva nta ge s of
FDI
• Improvement in the quality
of the factors of production

• Inflow in Investment funds


(Benefits to the balance of
payments)

33
Adva nta ge s of
FDI
• Faster growth of output
and employment
• Consumer Benefits

Price
Quality
Varieties 34
Adva nta ge s of
FDI
• Increase in Exports

• Increase in savings and


Investment

35
Cost s of F DI
• Negative effects on the
balance of payments.

• Crowding out effect-Credit


Constraits

• Discourage the development


of technical know-how 36
Cost s of F DI
• Detr iment of the
growth o f domesti c
producer and the
nati onal econ omy
• Transf er pricing
• Soc ial costs- Net loss
of jobs 37
Costs o f F DI
• Envir oment and
natural resourc e cos ts

• Abus e of lo ca l cul ture


and tradi ti ons Ex

FDI Tourism Abuse


38
Costs of FDI
• Facilita te hegemony by
th e dominant US a nd t he
we ster n cultur es.

Print TV Entertainments

• Political Influence (News)


39
Cost s of F DI
• Poli ti co- Strategi c
Interests

&
•Count ry‘ s Soverei gnty
is at stake. 40
How can FDI be better applied
to sustainable developments?
41
Rec omme nda tio
ns
•Com pa re th e P ro
and t he Co ns

•Dev el op
str at eg ies th at
tar ge ts th e rig ht 42
Rec omme nda tio
ns

• Cons inder the long


term effects to the
enti re econom y
and the s oci al wel l
bei ng of the
comm uni ty 43
Rec omme nda tio
ns
• Access abi lity and
Stab ility
– Political s tabilit y
– Market P ot ential and
acces ability
– Inf rast ract ure
– Priv atis ation and
der egulations o f mark ets
– Fair competit io n a nd 44
Rec omme nda tio
ns
• Soci al responsi bl e
Investment
– Thro ugh n atio nal, b il ate ral and
In ternational in vestm ents
Poverty es.
guidelin and gender inequality
eradication
Information Provision
Consumer rights
Labour standards
Corporate culture
45
Rec omme nda tio
ns
• Envir omental
protect ion
– Appl ication of
Envi romental Ma na gement
systems (EMS)
• Inspection,Monitoring,Regulation and
enforcement.

– Use of Envirome nt al 46
Wish u a merry x-mas and a
happy new year!!!

47

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